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FDIC v. BETANCOURT

October 17, 1994

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff,
v.
JOSE BETANCOURT and RENEWAL ARTS SUPPLY CORPORATION, Defendants.


Edelstein


The opinion of the court was delivered by: DAVID N. EDELSTEIN

EDELSTEIN, District Judge:

 Plaintiff, the Federal Deposit Insurance Corporation ("FDIC"), brings this action to recover the balance due on two promissory notes that were issued by defendants, Jose Betancourt ("Betancourt") and Renewal Arts Supply Corporation ("Renewal"), in March, 1990. Plaintiff moves for summary judgment, pursuant to Federal Rule of Civil Procedure 56, and defendants cross-move for summary judgment.

 BACKGROUND

 Over a period of years, defendant Betancourt had various dealings with Capital National Bank ("Capital") both individually and in his capacity as an officer of various companies. As part of these dealings, Betancourt signed several promissory notes in favor of Capital over an unspecified period of time. Defendants allege that on July 28, 1989, Betancourt borrowed $ 300,000 from Capital and signed an unsecured promissory note for that amount. On August 4, 1989, Betancourt went to Capital in order to pay various loan obligations owed to Capital. According to defendants, after Betancourt arrived at the bank, he spoke with a Capital representative and handed the representative a signed personal check made out to Capital, on which no dollar amount had been filled in. He then instructed the representative to "type in an amount on said check which was the up-to-date balance maintained in [Betancourt's] checking account at Capital National Bank." (Defendants' Brief at 5.) Pursuant to these instructions, the representative typed "$ 842,857.56" on the check's "amount" line. According to defendants, this sum was the total amount of money in Betancourt's checking account. Defendants allege that Betancourt told the representative to apply this money to satisfy the $ 300,000 loan that Betancourt had taken out on July 28, 1989 and to satisfy other, unspecified loan obligations that defendants owed Capital.

 Defendants allege that, although Capital cashed Betancourt's check, Capital never applied the check proceeds to any of defendants' debts. Defendants allege further that Betancourt twice wrote to Capital, asking why the check proceeds had not been credited against his various loan obligations. Defendants allege that Betancourt received no response to these letters and that Capital never credited the $ 842,857.56 toward the loan obligations that defendants owed Capital.

 Plaintiff does not contest any of these allegations. Instead, plaintiff argues that these allegations are irrelevant to the instant controversy, which concerns two promissory notes that were executed after these events transpired. The first promissory note at issue in this litigation was issued on March 1, 1990 ("the March 1, 1990 note"). On that day, defendant Betancourt signed a promissory note for $ 300,000 in favor of Capital. The note provides for repayment on June 5, 1990 of the entire principal plus interest at 14%. Betancourt made no payments on this note.

 Although defendants admit that Betancourt signed the March 1, 1990 note, they contend that an unspecified Capital employee obtained Betancourt's signature on the note by fraud. In his affidavit, Betancourt contends that he did not know what the document was or why he was signing it. (Betancourt Aff. P 10.) Further, he states that a Capital representative told him "to sign that document solely for reasons of internal bookkeeping of Capital National Bank and for no other reason whatsoever." (Betancourt Aff. P 10.) Betancourt also claims that he received no money in exchange for the March 1, 1990 note. (Betancourt Aff. P 10.)

 The second promissory note at issue in this litigation was issued on March 8, 1990 ("the March 8, 1990 note"). On that day, Renewal executed a promissory note for $ 150,000 in favor of Capital, and Betancourt guaranteed this note. The note bears a 17% interest rate and provides for repayment in forty eight equal monthly installments; the first installment was due April 4, 1990. Defendants paid eleven monthly installments on this note, but they did not pay the March 4, 1991 installment or any installments thereafter. Defendants do not claim that the March 8, 1990 note was procured by fraud.

 On July 6, 1990, the Office of the Comptroller of Currency appointed the FDIC to act as receiver for Capital National Bank. On August 2, 1991, the FDIC, in its capacity as receiver for Capital, commenced this action, seeking payment of the March 1, 1990 note and the March 8, 1990 note.

 DISCUSSION

 A party seeking summary judgment must demonstrate "that there is no genuine issue as to any material fact" such that it "is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987). The moving party has the initial burden of establishing the absence of a genuine issue of material fact. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970). If the movant satisfies this prerequisite, the non-moving party may nonetheless defeat summary judgment by coming forward with specific facts that show there is a genuine issue for trial. Fed. R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). This Court will deny summary judgment if the evidence bolstering the non-moving party's case is sufficient to lead a rational trier of fact to return a verdict in his favor. National Union Fire Ins. Co. v. Walton Ins. Ltd., 696 F. Supp. 897, 900 (S.D.N.Y. 1988). In determining whether this burden has been met, however, "it has long been the rule that 'on summary judgment the inferences to be drawn from the underlying facts contained in [the moving party's] materials must be viewed in the light most favorable to the party opposing the motion.'" Lendino v. Trans Union Credit Info. Co., 970 F.2d 1110, 1112 (2d Cir. 1992) (quoting Adickes, 398 U.S. at 158-59). "In considering the motion, the court's responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight, 804 F.2d at 11 (citations omitted).

 The parties agree on many of the material facts in this case. The parties agree that Betancourt signed a $ 300,000 promissory note on March 1, 1990 and that Betancourt made no payments on this note. The parties further agree that Capital's records indicate that the note has not been paid. Further, the parties agree that Renewal executed, and Betancourt guaranteed, a $ 150,000 promissory note on March 8, 1990, and that only eleven of the forty eight payments on this note were made. The parties also agree that the FDIC has assumed Capital's interest in these notes.

 As discussed above, defendants allege that several events transpired before the March 1, 1990 note was issued, and plaintiff does not dispute these allegations. Defendants contend that on July 28, 1989, Betancourt executed a $ 300,000 promissory note in Capital's favor. Defendants also contend that on August 4, 1989, Betancourt gave Capital a check for $ 842,857.56 with instructions that Capital should use this money to pay loan obligations that defendants owed Capital. Defendants allege that Capital cashed this check but failed to credit the proceeds against defendants' obligations. Plaintiff does not dispute these allegations but argues that they are irrelevant to the case at hand.

 On these facts, the FDIC has met its initial burden of establishing the absence of a genuine issue of material fact. The parties agree that Betancourt signed the March 1, 1990 note, which designates Capital as payee, and they agree that defendants made no payments on this note. The parties also agree that Renewal issued the March 8, 1990 note in Capital's favor, and they agree that thirty seven installment payments on this loan were not made. Further, they agree that the FDIC, as Capital's receiver, is entitled to collect any debts owed to Capital. Therefore, the plaintiff has met its initial burden of setting forth valid claims for payment of the two promissory notes and demonstrating the absence of a genuine issue of material fact.

 Because plaintiff has demonstrated a valid claim and the absence of any genuine issue of material fact, to defeat plaintiff's motion, defendants must come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Matsushita, 475 U.S. at 587. In opposition to plaintiff's summary judgment motion, defendants have raised a panoply of defenses.

 1. Limitations on Defenses that a Defendant Can Raise

 In cases brought by the FDIC to recover on promissory notes obtained from banks, both statute and case law preclude defendants from raising certain defenses. See 12 U.S.C. § 1823(e); D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 86 L. Ed. 956, 62 S. Ct. 676, reh'g denied, 315 U.S. 830, 86 L. Ed. 1224, 62 S. Ct. 910 (1942). *fn1" The D'Oench Duhme doctrine prohibits the maker of a promissory note from asserting a defense based on any agreement that would tend to deceive the FDIC. In D'Oench, Duhme, defendant sold bonds to an Illinois bank. When the bonds defaulted, defendant and the bank agreed to an arrangement that would allow the bank to avoid showing a loss on the bank's books. D'Oench, Duhme, 315 U.S. at 454. Defendant executed promissory notes in favor of the bank for the value of the bonds. However, the bank and defendant agreed that defendant would not repay the balance due on the notes, and the "receipts for the notes contained the statement, 'This note is given with the understanding it will not be called for payment.'" Id. Thereafter, the bank experienced financial difficulties, and the FDIC acquired these notes "as part of the collateral securing a loan of over $ 1,000,000 to the bank." Id. When the FDIC sued to collect on one of the notes issued by defendant, defendant argued that the FDIC could not collect because the FDIC was not a holder in due course and because "the note was given without any consideration whatever and with the understanding that no suit would be brought thereon." Id. at 456.

 The Supreme Court held that the issuer of a promissory note could not assert a defense of lack of consideration if "the note was designed to deceive the creditors of the public authority, or would tend to have that effect." Id. at 460. The Supreme Court reasoned that several federal statutes revealed "a federal policy to protect [the FDIC], and the public funds which it administers, against misrepresentations as to the securities or other assets in the portfolios of the banks which [the FDIC] insures." Id. at 457. Because the D'Oench, Duhme defendant "was responsible for the creation of the false status of the note in the hands of the bank," the Court held that defendant was estopped from asserting defenses that would defeat federal policies designed to protect the FDIC. Id. at 461. Thus, defendant could not assert a defense based on an agreement with the bank that did not clearly appear in the bank's records.

 In order to afford the FDIC additional, statutory protection, Congress passed 12 U.S.C. § 1823(e). In an action in which the FDIC seeks to recover on a promissory note, this statute prohibits an obligor from asserting a defense based on any agreement that does not clearly appear in a bank's records. Section 1823(e) states:

 
No agreement which tends to diminish or defeat the right, title or interest of the [FDIC] in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the [FDIC] unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank.

 12 U.S.C. § 1823(e).

 In 1987, the Supreme Court held that § 1823(e) bars the maker of a promissory note from asserting a defense of fraud in the inducement against the FDIC, even when the fraud does not take the form of an express promise. See Langley v. FDIC, 484 U.S. 86, 90, 96, 98 L. Ed. 2d 340, 108 S. Ct. 396 (1987). In Langley, the FDIC attempted to collect on a promissory note that it had acquired from a failed bank. See id. at 88. Defendants contended that the bank had fraudulently induced them to sign the note by misrepresenting facts about the piece of property that defendants had borrowed the money to purchase. See id. at 89. The Court held that § 1823(e) barred defendants from asserting the bank's misrepresentations as a defense because these ...


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